Watford Electronics Ltd v Sanderson CFL Ltd
Court of Appeal
Citations:  EWCA Civ 317;  1 All ER (Comm) 696;  BLR 143; (2001) 3 TCLR 14;  FSR 19;  CLY 953.
Watford agreed to buy a computer system from Sanderson. The parties made three contracts, one for the sale of the hardware, one for a software licence and one for bespoke modifications to the software. Each agreement was on Sanderson’s standard terms and conditions.
This included an ‘entire agreement’ clause which stated that the written contract represented the entire contract, and that neither party relied on any other representations. There was also the following limitation clause:
‘Neither [party] shall be liable to the other for any claims for indirect or consequential losses whether arising from negligence or otherwise. In no event shall [Sanderson’s] liability under the Contract exceed the price paid by [Watford] to [Sanderson] for the Equipment connected with any claim.’
Watford’s own standard terms, which were not a part of the parties’ contracts, contained a similar clause. Finally, the following ‘addendum’ clause was contained in each contract:
‘[Sanderson] commit to their best endeavours in allocating appropriate resources to the project to minimise any losses that may arise from the Contract.’
The computer system did not meet Watford’s needs. Watford sued Sanderson for misrepresentation, negligent misstatement and breach of various contract terms. When Sanderson tried to rely on the limitation clause, Watford responded that it was void for unreasonableness under s.3 of the Unfair Contract Terms Act 1977.
The first instance judge held that the two clauses were void for unreasonableness. In reaching this conclusion, the judge held that the existence of the entire agreement and addendum clauses were not relevant, nor was the fact that Watford had a similar clause in their own standard terms. Sanderson appealed.
- Should the judge have taken the entire agreement and addendum clause into account when considering the reasonableness of the limitation clause?
- Were Watford’s own standard terms relevant to whether Sanderson’s limitation clause was reasonable?
The Court of Appeal held that the terms were not void for unreasonableness.
- The limitation clause actually contained two terms which had to be considered separately. It should not be treated as one, indivisible clause.
- Considering the contract as a whole, including the entire agreement clause, the first sentence of the limitation clause could not be interpreted as excluding liability for pre-contractual representations. Its effect was solely to exclude liability for indirect and consequential loss.
- The second sentence, meanwhile, served the different purpose of limiting liability for direct losses to a specific sum.
- The addendum clause should be interpreted as defining the scope of the limitation clause. In particular, it meant that Sanderson could not rely on the limitation clause unless it could show it used best endeavours to allocate appropriate resources to the project to minimise losses resulting from failures of performance.
On this basis, the limitation clause was reasonably narrow. It was also relevant that Watford’s own standard terms contained a similar clause, which was evidence that such a term was reasonable. Other factors which influenced the court’s decision included:
- Watford was aware of the term;
- Watford was in a better position to anticipate and assess the potential for indirect and consequential loss;
- The market was such that Watford could have gotten better terms from Sanderson;
- The parties had equal bargaining power and had specifically negotiated over who would bear the risk of indirect loss;
- Watford had the resources to meet the excluded losses and could have obtained relevant insurance.
This Case is Authority For…
When determining whether a clause is void for unfairness under the Unfair Contract Terms Act 1977, it cannot be viewed in isolation. Its effect must be considered in light of the contract as a whole.
The court should focus on whether it was reasonable to include the clause in the contract at the time it was made. The court should not consider whether the ultimate effect of the clause, which may not have been anticipated by the parties, is reasonable.
Chadwick LJ noted that:
‘In circumstances in which parties of equal bargaining power negotiate a price for the supply of product under an agreement which provides for the person on whom the risk of loss will fall, it seems to me that the court should be very cautious before reaching the conclusion that the agreement which they have reached is not a fair and reasonable one.’
This is because commercial parties should ‘be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement.’